TT RAM MOHAN's comments on the Indian economy, banking and current affairs

Monday, April 03, 2017

Jio or maro?

Mukesh Ambani has bet $25 bn on Jio, his telecom venture. He has disrupted the market hugely, causing tariffs to fall and triggering consolidation amongst existing players. He has bagged 100 million customers. But will he make money out of his venture? Schumpeter, writing in the Economist, is sceptical:

Jio will start charging from April 1st. Yet even assuming it keeps
cranking prices up and wins a third of the market, a
discounted-cash-flow analysis suggests that it would be worth only
two-thirds of the sum that Mr Ambani has spent. To justify that amount
Jio would at some point need to earn the same amount of profit that
India’s entire telecoms industry made in 2016. In other words, there is
no escaping the punishing economics of pouring cash into networks and
spectrum. For every customer that Jio might eventually win, it will have
invested perhaps $100. Compare that with Facebook or Alibaba, both
asset-light internet firms, which have invested about $10 per user.

Schumpeter thinks Ambani might tweak his business model at some point in order to improve the economics of his project but he's unsure about the outcome:

Perhaps he hopes to get his money back by turning Jio into an internet
firm that offers payment services and content, not just connectivity.
China’s Tencent, which owns WeChat, a messaging service, has
successfully diversified into games and banking. Still, no telecoms firm
has managed this feat and it is hard to see how RIL’s clannish culture
can become a hotbed of innovation.

Or is this one big brand building exercise, one that builds equity not just with ordinary people but with the government as a huge exercise in inclusion?